Posted on May 31, 2013 by
Tax compliance hazards loom for unwary buyers of homes and other types of real property located in the United States. A buyer who fails to withhold 10 percent from the purchase price and remit this amount to Internal Revenue Service may be held liable for U.S. tax that a foreign seller was supposed to pay.
A federal law known as FIRPTA requires many buyers to withhold tax from the purchase price paid to foreign sellers in sales and other dispositions of U.S. real property interests. FIRPTA, short for the Foreign Investment in Real Property Tax Act of 1980, obligates buyers of land, homes, stock in real estate companies and other types of real property interests to determine, for tax withholding purposes, whether the seller is a tax resident of the United States or a foreign country.
The withholding requirement exists because foreign persons and foreign companies that sell U.S. real property interests often are subject to U.S. income tax. The Internal Revenue Service generally will treat any gain on such a transaction as U.S. taxable income (or, in technical terms, “effectively connected income”) irrespective of the transaction’s connection to a U.S. trade or business.
FIRPTA applies to dispositions of assets that meet the law’s definition of a “U.S. real property interest.” The property must be located in the United States or the U.S. Virgin Islands. It applies to parcels of land, homes and other structures, and personal property associated with their use, including machinery and furniture. It also applies to real property interests in natural deposits, such as mines and wells. Excluded from the law’s definition, however, is any interest in an asset that a creditor might have.
Buyers of U.S. real property interests must withhold 10 percent from the purchase price if the seller is a foreign person. Buyers are required to send this withheld amount, together with a completed Form 8288, to the Internal Revenue Service within 20 days of the transaction.
The same 10 percent tax withholding requirement applies to a domestic company with real property holdings that distributes them to foreign shareholders. A domestic company must withhold 10 percent of any such distribution if its purpose is to redeem stock or to liquidate the company. (A bigger withholding requirement applies to foreign corporations when they distribute U.S. real property interests to their shareholders. They are required to withhold tax equal to 35 percent of any shareholder gains recognized in such distributions.)
Stock sales by foreign persons also can create tax withholding liability under FIRPTA. The IRS will presume that stock in a domestic corporation is a U.S. real property interest unless contrary evidence is certified. The IRS dismisses its presumption if the foreign seller of the stock certifies before the transaction date that what he or she is selling is not a U.S. real property interest.
Whether a stock sale creates a FIRPTA liability depends on the company’s holdings of U.S. real property interests. The buyer would face a tax withholding requirement. He or she would if U.S. real property interests accounted for at least 50 percent of the company’s fair market value at any time during the holding period of the foreign seller (or, if shorter, the five-year period ending on the date of the disposition).
Tax withholding can happen gradually, rather than all at once, if a foreign seller accepts a series of installments payments from a buyer of U.S. real property interests. Hypothetically, a buyer who agrees to pay 10 percent of the total price annually over 10 years could withhold a tenth of the total price and remit this amount to the IRS each year.
A sale is just one type of asset transfer that can create FIRPTA issues for both parties in the transaction. The federal tax code imposes tax withholding requirements on buyers (or “transferees,” in IRS-speak) who enter into other types of dispositions by foreign persons (or “transferors”) including exchanges, liquidations, and redemptions.
Certain types transactions are beyond the reach of the FIRPTA withholding requirement. One is the sale of publicly traded stock in a corporation that meets the law’s definition of a U.S. real property interest holding company. Another exception applies when a foreign person sells a home in the United States for less than $300,000 and the buyer has definite plans to reside in the home at least half of the time in each of the first two years following the transaction.
Certain property exchanges also are insulated from FIRPTA. For example, an exchange of one U.S. real property interest for another may qualify for so-called “non-recognition” treatment by the Internal Revenue Service. The IRS also grants non-recognition to certain distributions of U.S. real property interests from foreign subsidiaries to their foreign parent companies.
FIRPTA applies even if no tax is ultimately owed by the foreign transferor. In such a case, FIRPTA withholding may be avoided by filing of non-recognition statements with the IRS within the allowed time frame.
For more information, call (305) 379-7000 or e-mail info@bpbcpa.com.
Using 1031 Exchanges for Maximum Tax Benefits by Edward N. Cooper
A tax-deferred exchange, commonly called a 1031 exchange, can be an effective strategy for real estate investors. After several years in decline due to erratic property values, we are seeing an increase in their use.
1031 exchanges minimize taxes when qualified properties are sold and purchased within a specific time frame. Property sales without a subsequent acquisition typically trigger a capital gain tax, in addition to applicable state taxes. A 1031 exchange should be a consideration for property owners or real estate investors who expect to reinvest the sales proceeds from the sale of their property into a new real estate investment.
Although the logistics and process of selling a particular real estate investment and subsequently buying another property remain typical, the fact that the investor has not converted his equity into cash but rather substituted his equity in one real estate endeavor for equity in another, when viewed in its totality, is considered an exchange. This pattern of reinvesting the sales proceeds into another real estate investment provides a valuable tax planning opportunity.
The tax code provides for the depreciation of capital real estate investments. Generally, the IRS allows a deduction for capital expenditures to acquire depreciable real estate at an average of 3% per year rate until it is fully depreciated or the property is disposed. As the property is depreciated, the basis for determining gain or loss upon its disposition is reduced annually by depreciation.
At the time of disposition, the gain recognized is the difference between the proceeds of sale and the property’s adjusted basis, which is the property cost reduced by depreciation taken. Consequently the gain to be recognized is a combination of (1) the increase in value of the property measured by the difference between the selling price of the property and the price paid to acquire it, and (2) the depreciation taken on the property since its acquisition.
To defer the gain on the sale of property both the property sold (“Relinquished Property”) the property acquired (“Replacement Property”) must be “like kind.” Under IRS Code Section 1031, any property which is considered real property under state law is “like-kind” with any other property which is deemed real property under that state law as long as such property is held for investment or used in a trade or business. For example, an investor may trade unimproved property for a shopping center, or farmland for an office building.
To fulfill the “reinvestment ” requirements of a 1031 exchange, the total purchase price of the replacement property must be equal to or greater than the total net sales price of the relinquished property. All the equity received from the sale of the relinquished property must be used to acquire the replacement property.
As a practical matter, it is seldom that a party that desires to sell property will find a buyer who has property the seller wishes to acquire. Consequently, the tax rules provide for a three-party exchange. In a three-party exchange, a party, acting as a limited agent (Qualified Intermediary or “QI”) for the taxpayer, agrees to receive the relinquished property, sell it for cash, use the proceeds to acquire the replacement property and subsequently transfer the replacement property to the seller.
Because the proceeds from the sale of the relinquished property are not made available to the seller and the seller enters the transaction with the QI predicated on the assumption that he will receive only replacement property from the QI, the reinvestment requirements of a tax-free exchange can be met. Any proceeds which are considered as being under the control of the taxpayer or its agents (other than the QI) will be potentially taxable proceeds.
A QI is a person or entity that facilitates an exchange by handling the following activities:
- Taking assignment of the taxpayer’s contractual right to sell the relinquished property
- Taking assignment of the taxpayer’s contractual right to acquire the replacement property
- Holding or making arrangements for the holding of the proceeds from the sale of the relinquished property. The taxpayer may not hold the proceeds (either directly or constructively through an agent) without causing the proceeds to be taxable as “boot”
- Preparing the documentation necessary to complete the exchange, including an exchange agreement, assignment agreements, closing instructions and related documents to permit each transaction to close as part of the exchange.
Additionally, a 1031 exchange requires that the replacement property must be subject to an equal or greater level of debt than the relinquished property sold or the buyer will be forced to pay tax on the amount of decrease.
1031 Exchange Timelines:
Investors wishing to take advantage of a 1031 exchange should be familiar with two timelines:
The identification period is the time frame in which a seller must identify a replacement property (or properties) he or she is considering. It is common to list more than one property. The identification period is exactly 45 days from the day of selling the relinquished property.
The exchange period is the time frame in which the seller must receive some or all of the replacement property which he or she has previously identified. This period ends exactly 180 days after the date on which the person transfers the relinquished property, or the due date of the person’s tax return for the year in which the transfer of the relinquished property has occurred, whichever is earlier. Both periods are generally exact times frames with no adjustments for holidays or weekends.
1031 exchanges are a valuable tool real estate investors who intend to reinvest the sales proceeds of qualified property should consider in order to defer their tax liabilities from the disposition of their real estate investments. We can help you navigate the complex rules.
Edward N. Cooper CPA is a director in the Real Estate and Tax Services practice of Berkowitz Pollack Brant. For more information, call (305) 379-7000 or e-mail info@bpbcpa.com
Wealthy citizens of foreign countries can earn profit and permanent residency in the United States, and Florida real estate is a popular asset class among these investors. The state’s resurgent residential, commercial and hospitality property markets have stoked interest in the federal government’s Immigrant Investor Program, better known as the “EB-5” program.
The program provides “green cards,” or permanent residence visas, officially known as EB-5 visas, to foreign investors who put money to work in the United States. One high-profile example of the impact of the EB-5 program is a downtown Miami development called Panorama. It has been reported that developer Tibor Hollo plans to finance this 85-story residential tower with equity investments by EB-5 visa petitioners.
Qualified petitioners for EB-5 visas must invest in a new or restructured U.S. business that creates or preserves at least 10 full-time jobs within two years. They also must operate the business and maintain their investment for at least two years. The minimum investment is $500,000 in rural areas and in areas with unemployment rates that match or exceed 150 percent of the national unemployment rate. The minimum investment in other areas is $1 million.
Qualified investors initially receive a conditional EB-5 visa, and after they conduct business in the United States for at least two years and meet other requirements, the conditions are lifted. Qualified investors also may obtain permanent residency status in the United States for their spouses and children.
But several potential obstacles can stall or stop an investment-based march toward a green card. Relatively few EB-5 visas are issued. U.S. Citizenship and Immigration Services (USCIS), the federal agency that administers the program, has issued fewer than the annual maximum of 10,000 every year since the program’s inception in 1992.
Foreign investors in U.S. ventures involving real estate acquisition or development, in particular, face special issues. A limited number of construction jobs will count toward the required job creation in a development project with EB-5 funding.
Excluded from the regulatory math, for example, are temporary jobs related to the installation of electrical wiring, plumbing systems and other construction work that would take several weeks or months to complete.
U.S. Citizenship and Immigration Services says on its website that investment money from EB-5 petitioners can be used to acquire real estate if the project creates permanent jobs. “It is important to note, however, that real estate acquisition is not generally recognized as a job-creating activity in and of itself,” the agency says in an EB-5 question-and-answer section on its website. “Thus, it is not generally reasonable to treat funds spent on real estate acquisition as inputs to an employment impact model.”
Both indirect employment and direct employment can count toward compliance with job-creation rules under the EB-5 program. Indirect employment counts toward mandated job creation if the project is designated as a “regional center” by the USCIS. “Regional center” projects can include the development of commercial real estate, industrial property and mixed-used buildings.
Estimates of indirect employment due to the planned construction of a new hotel or resort are subject to regulatory challenges. If a developer claims such a project would create indirect employment, USCIS requires supporting evidence in the form of projected increases in local tourism due to the project.
The agency says project approval hinges on “a preponderance of evidence that the development of the EB-5 project or resort will result in an increase in visitor arrivals or spending in the area,” to meet the lower employment test.
EB-5 petitioners get credit for preserving existing jobs only by investing in a “troubled business,” a label that may still apply to many real estate development companies in Florida. USCIS defines a “troubled business” as an enterprise that has operated for at least two years and suffered a net loss in the previous 12 months or 24 months that erased 20 percent of its net worth or more.
Among other obligations, an EB-5 petitioner must document the lawful source of funds for investment in a U.S. commercial enterprise and show that the funds went directly from his personal bank account to the account of the enterprise. Consider the hypothetical example of an EB-5 petitioner who is the sole owner of a foreign company and arranges for the company to pay him a dividend so he can invest in a venture to develop Florida real estate.
Moving that dividend money directly from the foreign company to the Florida venture is inadvisable because the USCIS is likely to slow the EB-5 application process by issuing an “RFE,” a request for evidence. A slower but surer approach by the EB-5 petitioner would be putting the cash in his personal bank account, setting aside some of the cash to pay tax on the income, then transferring the balance to the Florida venture’s bank account.
About the Author: John G. Ebenger is a director in the Real Estate and Tax Services practice at Berkowitz Polack Brant. For more information, call (561) 361-1010 or e-mail info@bpbcpa.com.
Posted on May 21, 2013 by
Rich Pollack was a panelist in the forensics discussion of the Bankruptcy Bar Association’s 2013 retreat. The case study and commentary generated a lively debate moderated by Judge Robert Mark. Click here to see the slide show. For more information, call (305) 379-7000 or e-mail info@bpbcpa.com.
Download the BBA Financial Advisors Presentation with Forensic Slides
Everyone knows that April 15 is the annual deadline to file individual tax returns and make payments. While extensions are possible for many situations, failing to file or pay can result in penalties.
Here are the facts.
If a taxpayer does not file by the deadline, a failure-to-file penalty may apply.
If a taxpayer does not pay all the taxes owed by the deadline, a failure-to-pay penalty may apply.
Failure-to-file penalties general exceed failure-to-pay penalties.
Taxpayers can reduce additional interest and penalties by paying as much as possible with their tax returns. The IRS can work with taxpayers to develop a payment plan if necessary.
Penalties for filing late are typically five percent of the unpaid taxes for each month or part of a month that a tax return is late. Penalties begin accruing the day after the tax filing deadline and will not exceed 25 percent of the unpaid balance.
Penalties for not paying are one half of one percent of the unpaid taxes and for each month or part of a month after the due date.
Taxpayers who have paid at least 90 percent of taxes owned and requested an extension will not be subject to a failure-to-pay penalty if they pay the remaining balance by the extended due date.
About the Author: Adam Cohen CPA is an associate director in the Tax Services practice of Berkowitz Pollack Brant Advisors and Accountants. For more information, call (954) 712-7000 or e-mail info@bpbcpa.com.
Posted on May 14, 2013 by
When individuals receive late 1099s or other proof of income, an amended return is in order. It is important, but not complicated, to file an amended return. Here are some things to keep in mind.
- Taxpayers should file an amended tax return if there is a change in filing status, income, deductions or credits. Your CPA can help determine is an amended return is required.
- Amended returns cannot be e-filed – paper filings are mandatory. However, taxpayers can use the Where’s My Amended Return tool on the IRS’s web site to follow its progress.
- Generally an amended return must be filed within three years from the date of the original return filing or two years from the date of paying the tax, whichever is later.
- If a taxpayer is amending more than one tax return, the 1040X for each return should be prepared and mailed to the IRS in separate envelopes.
- Any additional schedules or forms should be attached to the amended return.
- If the amended return will result in an additional refund, taxpayers should wait until they receive the original tax refund before filing an amendment.
- If the amended return results in additional taxes, file and pay the tax as soon as possible to minimize interest and penalties.
Our tax professionals can assist with amended returns, IRS disputes and other tax compliance issues.
Kenneth Strauss CPA/PFS, CFP is a director in the Taxation and Personal Financial Planning practice at Berkowitz Pollack Brant. For more information, call (954) 712-7000 or e-mail info@bpbcpa.com.
Posted on May 10, 2013 by
There is no doubt that Florida is a magnet for fraud. In fact, the IRS conducted a pilot program in the state to work more closely with law enforcement in an effort to crack down on stolen identity and stolen tax refunds. The program was recently expanded to all 50 states after showing success in stopping fraudulent and suspicious returns.
At Berkowitz Pollack Brant we have experience assisting taxpayers whose Social Security Numbers have been used fraudulently. Our team understands how to report misappropriation to the IRS for effective response. Protections put in place for future returns, including Personal Identification Numbers (PIN), add a level of complexity to filing that can be made simpler when an experienced profession is on your side.
The IRS reports that it has been successful in several identity theft areas, pointing to its stopping $20 billion in fraudulent refunds and 5 million suspicious returns in 2012, up from $14 billion and 3 million in 2011. It has resolved more than 200,000 identity theft cases since the beginning of 2013 and issued 770,000 identity protection personal identification numbers (IP PINs), a PIN that helps protect taxpayers who have already had their identities stolen. It has also pursued more than 670 criminal identity theft investigations and convicted offenders are receiving sentences from four to 20 years.
Data protection and integrity are important to Berkowitz Pollack Brant. Our secure portal enables clients to upload and store information in a paperless and encrypted environment. This helps to protect confidential information from the threat of theft.
Joanie Stein CPA is a senior manager in the Tax and Wealth Services practice of Berkowitz Pollack Brant. For more information call (305) 379-7000 or e-mail info@bpbcpa.com.
Posted on May 08, 2013 by
The US Senate recently approved legislation that will require online retailers to collect sales taxes from online purchases even if the retailer does not have a physical presence in the city in which the consumer resides.
The Marketplace Fairness Act has attracted wide support from brick-and-mortar retailers who have seen shoppers come to their stores to check out merchandise only to order it online. Many state governments have also supported the bill.
Web retailers have opposed the legislation, arguing that it would be too difficult to calculate and collect sales taxes from every state.
The bill passed by the Senate allows each member state of the the Streamlined Sales and Use Tax Agreement, the multistate agreement for the administration and collection of sales and use taxes, to collect and remit sales and use taxes for remote sales under provisions of the agreement, but only if the agreement includes simplification requirements for the administration of the tax, audits and streamlined filing.
Sellers that qualify for a small-seller exception, which is applicable to retailers with annual gross receiptsfrom U.S. remote sales not exceeding $1 million, would be exempt.
The bill now goes on to the House for its vote.
This bill will impact many of our clients, and we will continue to monitor it closely and bring you updates. If you have any questions about state and local tax issues, please do not hesitate to call.
Karen A. Lake CPA is a State and Local Tax (SALT) expert in Berkowitz Pollack Brant’s tax practice. For more information, call (305) 379-7000 or e-mail info@bpbcpa.com.
In order to compete today, business owners must keep one eye on the developing issues and one eye on the controls that create checks and balances. It is not imperative to develop to adopt a gold standard of corporate governance but there are initiatives that can make a big difference.
Adopting programs such as an enterprise risk management function, an internal audit department or a comprehensive anti-fraud program, especially for smaller entrepreneurial business, can be very expensive. However, a basic set of good internal controls over cash, accounts receivable, procurement and purchasing, accounts payable, inventory, fixed assets, payroll, customer and financial data, and information technology can protect from the common situations that can bring a business down.
An experienced accountant or consultant can help create a basic structure that will help a business owner sleep at night and focus his or her energy on activities that will grow the company.
The First Steps
Questions that advisors ask early in the process may seem basic, but the answers quickly uncover possible pain areas.
- If you still receive cash is it deposited daily?
- Are checks received endorsed with the words for deposit only?
- Did someone other than the preparer review and approve all outgoing wires?
- Are bank transfers reviewed and approved?
- Are accounts receivable substantiated by supporting documents?
- Did someone approve write-offs or credit memos?
- Are bank statements reconciled on a monthly basis by someone who does not have access to bank accounts?
- Are bank reconciliations reviewed and approved by management?
- Did we match the purchase order and receiving report to the invoice before paying the vendor?
- Was the vendor on an approved vendor list?
- Did someone compare inventory changes to cost of goods sold activity?
- Are small sized, high-value fixed assets secured?
- Does someone periodically compare employee name, pay rate and salary to current HR files?
- Is the payroll direct deposit register reconciled with the bank account on a regular basis?
- Do all the employees on the payroll actually work for the company?
- Are the company credit card statements reviewed and approved prior to payment processing?
- Did someone review and approve expense reports to ensure business purpose and reasonableness?
- Do computer passwords automatically expire every 30-60 days?
- Are computer system servers, routers and firewalls secured in a safe and cool place?
- Are the QuickBook data files restricted to the appropriate employees?
- Is there a checklist for all accounting and operational procedures?
- Do new employees undergo a complete background and credit check?
- Is monthly financial information reviewed and compared to budget, prior month and prior year?
- Do employees receive and sign a code of conduct and ethics every year?
- Can employees submit company related concerns confidentially and anonymously?
At Berkowitz Pollack Brant, we have assisted companies of all sizes and ages in establishing and monitoring their risk-protection parameters. For some entities we do everything from create the program to monthly monitoring and for others we build the framework, roll it out to employees and leave the implementation to the owners. We can do the same for you.
Steve Nouss CPA CGMA is chief consulting officer at Berkowitz Pollack Brant Advisors and Accountants. For more information, call (954) 712-7000 or e-mail info@bpbcpa.com.
Posted on May 02, 2013 by
Despite swiftly passing through the Florida Senate and House by wide margins, an alimony reform bill was vetoed by Governor Rick Scott.
The governor’s office reported that he was concerned about retroactive clauses that would have allowed many settled cases to be reopened for modifications. This could result in significantly reducing or even eliminating alimony payments already in effect, which would leave many recipients to rely on the state for assistance.
Surely this is not the end of the alimony reform debate, and a new bill is expected to be presented for next legislative session. We are monitoring the situation closely and will continue to provide timely updates.
Sandra Perez CPA is a director in the Forensics and Family Law practice of Berkowitz Pollack Brant. For more information call 945-712-7000 or e-mail info@bpbcpa.com.
